[Congressional Bills 116th Congress]
[From the U.S. Government Publishing Office]
[S. 2383 Introduced in Senate (IS)]

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116th CONGRESS
  1st Session
                                S. 2383

   To establish minimum standards of disclosure by franchises whose 
 franchisees use loans guaranteed by the Small Business Administration.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             July 31, 2019

 Ms. Cortez Masto introduced the following bill; which was read twice 
  and referred to the Committee on Small Business and Entrepreneurship

_______________________________________________________________________

                                 A BILL


 
   To establish minimum standards of disclosure by franchises whose 
 franchisees use loans guaranteed by the Small Business Administration.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Small Business Administration 
Franchise Loan Transparency Act of 2019''.

SEC. 2. FINDINGS; PURPOSE.

    (a) Findings.--Congress finds that--
            (1) franchise businesses represent a large and growing 
        segment of the retail and service businesses of the United 
        States and are rapidly replacing more traditional forms of 
        small business ownership in the economy of the United States;
            (2) the Small Business Administration guarantees much of 
        the financing available in franchising;
            (3) the Small Business Administration requires pro forma 
        projections, including projected revenue, for the first year of 
        operations of a franchise as part of the standard operating 
        requirements for a franchisee to qualify for financing;
            (4) on July 13, 2011, the Office of Inspector General of 
        the Small Business Administration published an audit (Report 
        No. 11-16) on loans made under section 7(a) of the Small 
        Business Act (15 U.S.C. 636(a)) (in this section referred to as 
        ``7(a) loans'') to Huntington Learning Center franchises where 
        first year revenue projections were all significantly inflated;
            (5) on July 2, 2013, the Office of Inspector General of the 
        Small Business Administration published an audit evaluation 
        (Report No. 13-17) showing that the Administration needed to 
        improve the management of the 7(a) loan portfolio risk, 
        specifically with certain franchise brands that had 
        exceptionally high default rates that continued to receive 
        guaranteed loans from the Administration;
            (6) in September 2013, the Government Accountability Office 
        published a study (GAO-13-759) showing that over the 10-year 
        period from 2003 to 2012, 28 percent of 7(a) loans provided to 
        franchises required a guarantee payment;
            (7) the study described in paragraph (6) was based on 
        32,323 loans totaling $10,600,000,000, which required 
        $1,500,000,000 in guarantee payments;
            (8) the report for the study described in paragraph (6) 
        stated, ``Potential franchisees should include first-year 
        revenue estimates in their SBA loan applications. However, this 
        information is not necessarily available to potential 
        franchisees in the franchise organization's disclosure 
        document.'';
            (9) franchise companies most often collect royalties based 
        on gross revenue, therefore revenue data on each franchise 
        outlet are readily available; and
            (10) while both the franchisor and the lender profit as a 
        result of financing from the Small Business Administration, the 
        total liability for the loan is born by the franchisee.
    (b) Purpose.--The purposes of this Act are to--
            (1) ensure transparency in the loan processes of the Small 
        Business Administration so that the franchisee borrower, the 
        lender, and the Administration all have access to information 
        that is key to the lending process;
            (2) lower the fees and rates charged to franchisee 
        borrowers; and
            (3) help ensure lower default rates in order to make more 
        money available for loans to viable franchise brands.

SEC. 3. DEFINITIONS.

    In this Act--
            (1) the term ``disclosure document'' means the disclosure 
        document required to be furnished by a franchisor to a 
        prospective franchisee under section 436.2 of title 16, Code of 
        Federal Regulations, as in effect on July 1, 2007;
            (2) the term ``Financial Performance Representation 
        Commentary'' means the Financial Performance Representation 
        Commentary adopted by the North American Securities 
        Administrators Association on May 8, 2017; and
            (3) the terms ``franchise'', ``franchisee'', and 
        ``franchisor'' have the meanings given those terms in section 
        436.1 of title 16, Code of Federal Regulations, as in effect on 
        July 1, 2007.

SEC. 4. REQUIRED DISCLOSURES.

    (a) In General.--Subject to subsection (b), a franchisor, except 
for a franchisor of a franchise in the lodging industry, that qualifies 
for guaranteed lending from the Small Business Administration for the 
franchises of the franchisor shall, at a minimum, disclose in the 
disclosure document required to be furnished by the franchisor to any 
prospective franchisee the following information for each of the 3 
years preceding the date of the disclosure document:
            (1) The average and median first-year revenues for all 
        businesses operated under franchises granted by the franchisor, 
        in accordance with the Financial Performance Representation 
        Commentary.
            (2) The total number of businesses operated under 
        franchises granted by the franchisor that, during the first 
        year of operation, either--
                    (A) ceased operations; or
                    (B) were transferred to a new franchisee.
            (3) The average and median revenues for all businesses 
        operated under franchises granted by the franchisor, in 
        accordance with the Financial Performance Representation 
        Commentary.
    (b) Limitation.--A franchisor may not disclose to a prospective or 
current franchisee, directly or through a third party, any information 
relating to revenue that conflicts with the information relating to 
revenue provided under subsection (a) in a disclosure document unless 
the relevant franchise purchase includes 1 or more businesses under the 
relevant franchise that are in existence on the date on which the 
disclosure is made, in which case the franchisor shall disclose to the 
prospective or current franchisee the relevant information relating to 
revenue as of the date on which the disclosure is made with respect to 
those businesses.

SEC. 5. ENFORCEMENT.

    The Administrator of the Small Business Administration--
            (1) shall enforce the requirements under this Act; and
            (2) may hold a franchisor liable for the balance of any 
        loan obtained through a violation of this Act.

SEC. 6. NO PREEMPTION.

    Nothing contained in this Act shall prohibit an authorized State 
official from proceeding in State court on the basis of an alleged 
violation of any civil or criminal statute of that State.

SEC. 7. SEVERABILITY.

    If any provision of this Act or any application of this Act to any 
person or circumstances is held invalid, the remainder of this Act and 
its application to any person or circumstance shall not be affected 
thereby.
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